Amending the Resource-based View of Strategic Management From an Entrepreneurial Perspective

8/17/2019 Amending the Resource-based View of Strategic Management From an Entrepreneurial Perspective

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gareth.jones Section name

Amending the resource-basedview of strategic managementfrom an entrepreneurial

perspective

Amending the resource-basedview of strategic managementfrom an entrepreneurial

perspective

byby

A TokudaA Tokuda

2004018

Henley Business SchoolUniversity of ReadingWhiteknightsReadingRG6 6AA

United Kingdom

www henley reading ac uk


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Amending the Resource-based view of Strategic Management from an

Entrepreneurial Perspective

Akio Tokuda,

Visiting Research Fellow, Centre for Institutional Performance,

The School of Business, University of Reading.

Address for correspondence:

Associate Professor, Department of Business Administration,

Ritsumeikan University,

1-1-1 Noji-higashi, Kusatsu-city, Shiga Prefecture.

525-8577 JapanE-mail: [email protected]

Key words: resource-based view, entrepreneurship, disequilibrium

Acknowledgements: I would like to especially thank professor Mark Casson for his

thoughtful and invaluable assistance on this paper through our collaborative research at

Reading University, and professor Nicolai J Foss (Copenhagen Business School) and an

anonymous reviewer at CIP for giving me helpful comments on the early version of

this paper.

ABSTRACT

The purpose of this paper is to amend the resource-based view of strategic management

from an entrepreneurial point of view. We firstly attempt to make a brief survey of the

conceptual framework of the RBV by contrasting it with the competitive forces approach

(CFA) presented by Porter (1980). Secondly, we clarify the objectives of corporate strategy

through a critical assessment of the RBV from both a static and a dynamic point of view.

Finally, we suggest a new perspective of the RBV by amending it from an entrepreneurial

viewpoint, and then take some examples to illustrate the new perspective for further

empirical studies.

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INTRODUCTION

The purpose of this paper is to amend the resource-based view (RBV) of strategic

management from an entrepreneurial point of view. Many scholars have attempted to

investigate into the mechanism of sustainable competitive advantage of a firm through the

RBV with original concepts such as ‘core competence’ (e.g., Hamel & Praharad, 1994),‘dynamic capability’ (e.g., Teece, Pisano & Shuen, 1997) ‘VRIO framework’ (Barney,

2002), ‘capability lifecycle’ (Helfat & Peteraf, 2003), and ‘routine and skills’ (e.g., Nelson

& Winter, 1982). However little work in RBV has been made to grasp the role of

entrepreneurship as the crucial source of competitive advantage, despite the abilities of the

entrepreneur are undoubtedly the principal human resources possessed by firms (see

Alvarez & Barney, 2000 for an exception). This paper attempts to incorporate the theory of

entrepreneurship into the RBV of strategic management, while critically dealing with the

RBV from an entrepreneurial viewpoint.

The paper is divided into tree parts. First, a brief survey is given of the conceptualframework of the RBV. It is helpful for us to grasp the characteristics of its framework by

contrasting with the competitive forces approach (CFA) presented by Porter (1980), because

it is said that the CFA explores the source of sustainable competitive advantage in the

external environment of the firm (i.e., attractiveness of industry where they are located),

while the RBV pays attention to the internal resources of the firm (i.e., the heterogeneous

resources that a firm possesses). Second, we clarify the objectives of corporate strategy

through a critical assessment of the RBV from both a static and a dynamic point of view.

Barney’s fundamental concept of the RBV is examined. Third, we suggest a new

perspective of the RBV by amending it from an entrepreneurial viewpoint, and then take

some examples to illustrate the new perspective for further empirical studies.

1. THE CONCEPTUAL FRAMEWORK OF THE RBV

1.1 Strategy and External Environment of a Firm

Traditional research on strategic management suggests that firms need to seek a strategic fit

between the external environment; i.e., opportunities and threats, and internal resources; i.e.,

strengths and weaknesses (e.g., Andrews, 1967; Itami, 1987). However, considerable

emphasis has usually been given to a firm’s competitive environment and its competitive

position (Das & Teng, 2000). Considering the source of sustainable competitive advantage

of a firm, it is widely accepted that the dominant viewpoint in the strategic management

theory throughout the 1980s was the CFA presented by Porter (1980). His conceptual

framework was mainly based on the structure-conduct-performance paradigm of the theory

of industrial organization (Bain, 1959; Mason, 1949). It is no exaggeration to say that Porter

(1980) specifically brings a concept of ‘competition’ for the first time in strategic

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management theory. The most innovative part of his work in this field is that he constructs a

consistent framework for thought so as to examine concrete questions like “how will a firm

able to get a competitive advantage over its competitors?”

In the CFA, the industrial structure strongly influences the rules of competition, as well

as the strategies potentially available to the firms belonging to that industry. Therefore the

strategic issue for a firm seems to concern their competitive positioning in the industry.They seek a favorable position in order to gain a monopoly rent (Teece, 1984), while

avoiding involvement in competition or moderating competitive pressures by influencing

industry structure and their competitors’ behavior. To help the firm find such a positioning

in the industry, Porter (1980) advanced a ‘five-force model’. This consists of five industry-

level forces: i.e., entry barriers, threat of substitution, bargaining power of supplier,

bargaining power of buyer and rivalry among industry incumbents, which determine the

inherent profit potential of an industry or sub-segment of it.

However, a series of empirical surveys have failed to support the link between industrial

structure and the performance of a firm. Some studies show the variance in firm performance between industries is substantially less than that within industries (e.g.,

Jacobson, 1988; Hansen & Wernerfelt, 1989; Rumelt, 1991). Others also identify systematic

and significant performance differences among firms which belong to the same strategic

group within an industry (Cool & Schendel, 1988). Research has suggested that the internal

resources of a firm rather than the external environment around the firm are possibly the

primary source of performance differences among firms. This result is bringing a growing

number of researchers to the RBV of strategic management to explain the differences by

focusing their attention on resource heterogeneity in an industry and the source of

sustainable competitive advantage of the firms.

1.2 Strategy and Internal Resources of a Firm

Since the mid 1980s, the RBV has emerged as one of the substantial theories of strategic

management (Barney, 1986a; Rumelt, 1984; Wernerfelt, 1984), even though it is said that

the RBV does not presently appear to meet the empirical content criterion required of a

theoretical system (Bacharach, 1989; Hunt, 1991; McKelvey, 1997; Priem & Butler,

2001a,b). The increased attention to firms’ resources by researchers has seemed to be

beneficial in helping to clarify the potential contributions of resources to competitive

advantage, as well as to introduce strategy scholars to a number of useful descriptive

theories from industrial organization economics (e.g., Alchian & Demsetz, 1972, on

‘teamwork’ production, or DeVany & Saving, 1983, on price as a signal of quality), and

furthermore to alleviate a previous analytical overemphasis on the opportunities and threats

that arise from the product side (Priem & Butler, 2001a).

The RBV suggests that the resources possessed by a firm are the primary determinants of

its performance, and these may contribute to a sustainable competitive advantage of the firm

(e.g., Hoffer & Schendel, 1978; Wenerfelt, 1984). According to Barney (1991), the concept

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of resources includes all assets, capabilities, organizational processes, firm attributes,

information, knowledge, etc. controlled by a firm that enable the firm to conceive of and

implement strategies that improve its efficiency and effectiveness (Barney, 1991; Daft,

1983).

In the early stage of the RBV, the main concern was to identify the characteristics of

resources that are not subject to imitation by competitors. If the resources possessed by afirm can easily be replicated by competitors, even though the resources are the source of

competitive advantage of the firm, then the advantage will not last long. Dierickx & Cool

(1989a) describe how the sustainability of a firm’s asset position hinges on how easily its

resources can be substituted or imitated, and imitability is linked to the characteristics of the

asset accumulation process: i.e., time compression diseconomies, asset mass efficiencies,

inter-connectedness, asset erosion and casual ambiguity. In the same way, several other

characteristics have been explored such as unique historical conditions, causal ambiguity

(Reed & DeFillippi, 1990), social complexity, isolating mechanism and so on (Barney,

1991; Lippman & Rumelt, 1982; Rumelt, 1984).

1.3 Resources and Capability

Let us develop the concept of resources a little further. For instance, Grant (1991) notes the

distinction between resources and capability as follows:

Resources are inputs into the production process … [they] include items of capital

equipment, skills of individual employees, patents, brand names, finance, and so on. But,

on their own, few resources are productive. Productive activity requires the cooperation

and coordination of teams of resources. A capability is the capacity for a team of

resources to perform some task or activity. (Grant, 1991: 118-119)

In the same manner, Amit & Schoemaker (1993) define resources as stocks of available

factors that are owned or controlled by the firm, which are converted into final products or

services. Capabilities, in contrast, refer to a firm’s capacity to deploy resources, usually in

combination, using organizational processes, to produce a desired effect. Hence, the

presence of capability enables resources to begin to be utilized, and the potential for the

creation of output arises. While resources are the source of a firm’s capabilities, capabilities

are the main source of its competitive advantage (Grant, 1991). The important point of this

approach compared to the early stage of RBV is that, for the sake of gaining a sustainable

competitive advantage, capability is regarded as more important than resources per se, and

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this implies that the firm-specific way of cooperation and coordination of resources causes

the heterogeneity among firms in an industry1.

This thought can be theoretically traced back to Penrose’s (1959) work. She regards a

firm as more than an administrative unit, it is also a collection of productive resources

which including the both physical and human resources. According to Penrose, it is never

‘resources’ per se that are the ‘inputs’ in the production process, but only the ‘services’ thatthe resource can render, that is, “The services yielded by resources are a function of the way

in which they are used ―exactly the same resources when used for different purposes or in

different ways and in combination with different types of or amounts of other resources

provide a different service or set of services. The important distinction between resources

and services is not their relative durability; rather it lies in the fact that resources consists of

a bundle of potential services and can, for the most part, be define independently of their

use, while services cannot be so defined, the very word ‘service’ implying a function, an

activity. As we shall see, it is largely in this distinction that we find the source of the

uniqueness of each individual firm” (1959: 25).The result of this is that the concept of ‘capability’ is the capacity of a firm to convert

resources they possess into the ‘service’. The relationship can be formulated as

S = f (C, R)

for some general function f (.) so that C and R are the parameters of S, where C is

capacity of capability, R is resources, and S is service.

The difference, or possibly the uniqueness, of a firm largely comes from these capabilities.

Much recent research in this area has been based on empirical studies of the firm-specific

ways of cooperation and coordination that bring sustainable competitive advantages for the

firm (e.g., Fujimoto, 1999; Iansiti, 1998).

2. CRITICAL ASSESSMENT OF THE RBV

2.1 Examine the RBV from a Static Viewpoint

Having made a brief survey of the conceptual framework of the RBV by contrasting with

the CFA, we now attempt to clarify the objective of corporate strategy through a critical

assessment of the RBV. Barney’s (1986a, 1991, 2001) conceptual framework of the RBV

has been used, because as Priem & Butler (2001a) remark, many RBV proponents either

paraphrase his statements or simply cite his articles (i.e., Barney, 1991), without an

1 To deepen the concept of capability, Grant (1991) invokes the concept of ‘organizational routine’ from

evolutionary theory (e.g., Nelson, 1991). He views capability as a routine or a number of interacting routines,

and organization as a huge network of routines.

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augmented definition (e.g., Bates & Flynn, 1995; Brush & Artz, 1999; Lits, 1996; Powel,

1992a, b; Rindova & Fombrun, 1999; Yeoh & Roth, 1999), and operate under his

framework in their conceptual and empirical work 2. His (1991: 105-106) conceptual

framework may be paraphrased as follows (1991: 105-106):

Firstly we make two assumptions in analyzing sources of sustained competitiveadvantage: (Ⅰ) firms within an industry (or group) may be heterogeneous with respect

to the strategic resource they control, and (Ⅱ) these resources may not be perfectly

mobile across firms, and thus heterogeneity can be long lasting. Under these

assumptions, we assert that the resource must have four attributes: (a) it must be

valuable, in the sense that it exploit opportunities and/or neutralizes threats in a firm’s

environment, (b) it must be rare among a firm’s current and potential competition, (c) it

must be imperfectly imitable, and (d) there cannot be strategically equivalent substitutes

for this resource that are valuable but neither rare or imperfectly imitable. Conditions (a)

and (b) produce competitive advantage, and (c) and (d) relate to sustainability.

Two points should be noted here regarding this argument. Firstly, Barney’s concept of

‘valuable’3 is an ambiguous benchmark with which to measure the competitive advantage of

a firm. Whether the resource is valuable or not ought to be measured by its profitability, and

thus it takes the form of an economic asset regardless of how tangible or intangible it is. The

value of any resource should be measured by the discounted value of the expected future

income (or rent) stream that can be attributed to it.

In the RBV the valuable endowments of a firm are taken as given. The planning and

investment necessary to build up such resources are exogenous in this framework. This

means there is the fear that the RBV will overstate the profitability of firms exploiting these

resources, because they ignore the cost of acquisition and accumulation. Therefore it is

impossible for the RBV to explain why firms invest in such a valuable resource rather than

in other type of resources. In addition, if the firms want to realize their competitive

advantage or maximize their profit (i.e., super-normal profit in the Marshallian sense) from

2 Priem and Butler investigate whether the RBV arguments regarding competitive advantage meet the

generally accepted criteria for classifying a set of statements as a theory, See Priem & Butler (2001a, b) and

also Barney’s counter-argument (Barney, 2001).3 He defines valuable resources in variety of ways, for example: a firm’s resources and capabilities are

valuable if, and only if, they reduce a firm’s net cost or increase its revenues compared to what would have

been the case if this firm did not possess those resources (2002: 162); a firm’s resources and capabilities are

valuable if, and only if, they reduce a firm’s net cost or increase its revenues compare itself to with other

successful firms (2002: 188: footnote 23). These definitions take account of the cost of acquiring these

resources, however it is still incompetent to fulfill the conditions for acquiring and realizing a competitive

advantage.

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the resources they possess, they have to take into account of the demand-side characteristics

that influence on the final price of their output. The values of resources are determined by

demand-side characteristics, and those are also exogenous to the RBV model (Priem &

Butler, 2001a, b). We never have a priori information on the competitive advantage among

firms that will result in super-normal profit, on the contrary, we know a posteriori the

existence of the competitive advantage by virtue of the existence of super-normal profit.After all, the emphasis is on how to sustain such a valuable resource over the long term

without adequate appreciation of its economic value. Therefore it is open to criticism that

the RBV contains a theory of sustainability but not a theory of competitive advantage

(Priem & Butler, 2001b).

Secondly, the concept of a ‘rare’ resource does not necessarily ensure the competitive

advantage of the firm, even if that resource generates a large ‘rent’ due to its relative

scarcity. In The Wealth of Nations, Smith had already recognized this point. He stated:

[I]f the one species of labour requires an uncommon degree of dexterity and ingenuity,the esteem which men have for such talents will naturally give a value to their produce,

superior to what would be due to the time employed about it. Such talents can seldom be

acquired but in consequence of long application, and the superior value of their produce

may frequently be no more than a reasonable compensation for the time and labour

which must be spent in acquire them. (Smith, 2000 [1776]: 53)

Rents are the prices of services yielded by resources (Lewin & Phelan, 2002). In this phase

rent is nothing more than the rental price of the service of the resource whether it is rare or

not. After remunerating all the factors of production, no profit has been left to the firm

(Demsetz, 1973; Barney, 1986a; Rumelt, 1987). If there is a firm gaining profit from the

resource, it is simply that the firm squeezes some part of the rent from the owner of the

resources.

Many RBV researchers identify the concept of ‘rent’ (e.g., Mahoney & Pandian, 1992;

Petaraf, 1993; Rumelt, 1987), that is expressed in various forms, i.e., Ricardian rent,

Marshallian rent, Paretian rent, and quasi-rent, as those, which accrue from the relative

differentiation of resources a firm control4. They consider the concept of ‘competition’ as

the states that firms compete in factors of production markets over the relative advantage of

the resources they acquire or accumulate, rather than compete in final-product markets over

the price of their products and services.

4 We have to bear in mind the fact that rent will be paid even though all of land is homogeneous or even if the

land is not fertile. Rent is not paid due to the relative difference of the land’s fertility but by the fact that land

is merely scarce (Lewin & Phelan, 2002). The difference in fertility reflects in the diference in rental rates,

however, the rental rate is nothing to do with the profitability of a firm. The owner of any resources just asks

for the rents (i.e., wage, rent, and interest) according to its rate.

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However, from the static point of view, all of the relative advantages of these resources

ought to be compensated for their owner. And the source of competitive advantage of the

firm remains only by their monopoly rent. In this case alone, a firm would be able to gain

super-normal profit at the cost of social welfare. It follows from what has been said, that the

RBV contains the conditions of sustainability, but it does not fulfill the conditions for

acquiring and realizing a competitive advantage. Only firms that already possess acompetitive advantage are qualified to adopt the RBV in order to secure its monopolistic

positioning.

2.2 Examine the RBV from a Dynamic Viewpoint

Given that the RBV is nothing more than an indication of the condition for competitive

firms to sustain their advantage, how can we investigate the academic value in the RBV in

terms of explaining the source of the competitive advantage of a firm? By examining

Barney’s (1986a, 2001) research, we see that he might recognize the existence of super-

normal profit and the source of competitive advantage besides valuable and rare resources.The ‘strategic factor market imperfection’ is the key concept for finding the academic value

in the RBV.

The strategic factor markets are developed when a firm requires the acquisition of

resources in order to implement its strategy (Barney, 1986a). These markets are where firms

buy and sell the resources necessary to implement their strategies (Barney, 1986a;

Hirshleifer, 1980). Hence the economic performance of the firms depends not only on the

returns from their strategies but also on the cost of buying the resources from these markets

to implement those strategies. And the costs of those resources are determined by the

characteristics of the factor markets. Relevant to this point is Barney’s following remark:

The existence of strategic factor markets has important implications for return to product

market strategies implemented by firms, for the size of returns to product market

strategies will depend on the cost of the resources necessary to implement them. And the

cost of these resources will depend on the competitive characteristics of the relevant

strategic factor markets. If strategic factor markets are perfectly competitive …[then]

firms will only be able to obtain normal returns from acquiring strategic resources and

implementing strategies. Firms can only obtain greater than normal returns …[then]

when the cost of resources to implement those strategies is significantly less than their

economic value, i.e., when firms create or exploit competitive imperfections in strategic

factor markets. (Barney, 1986a: 1232).

This remark shows that valuable and rare resources are not the source of competitive

advantage or above normal return if the cost of acquiring or developing these resources

equals the value they create when used to conceive of and implement a strategy. However,

there is an implied possibility that the competitive advantage may come from the

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imperfections in strategic factor markets. Different firms in these markets will have

different expectations about the future value of a strategy that creates this imperfection

( Ibid ., 1986a), and the owners of the firm also have different expectations about the future

return of their resources ( Ibid ., 2001). Therefore, different expectations toward the

resources produce the possibility of a competitive advantage for a firm. This kind of

competitive advantage, named ‘economic rents’ by Barney, reflect the creative andentrepreneurial ability of firms to discover how to generate value with their resources in

ways that other firms and outside owners cannot anticipate ( Ibid ., 1986a, 2001). Firms that

intend to obtain a competitive advantage must be consistently better informed concerning

the future value of these resources than other firms.

Examining the Barney’s concept of ‘strategic factor market imperfection’, we are able to

interpret that the characteristics of ‘competition’ are not in the world of static states

(equilibrium), but in the world of dynamic processes of change (disequilibrium). As

mentioned above, no rents emerge in the world of static states. Lewin & Phelan clearly

describe this point:

If the price of any resource reflects the discounted value of its expected future earnings,

and if everyone shares the same correct expectations, then that price includes all correctly

anticipated value components. There are no strategic decisions to be made. Ex ante

values will turn out to be equal to ex post values. There will be no ‘surplus’ or ‘abnormal’

rents, because all resource owners, whether they sell or rent their resource, will correctly

impute any value added by their resource to any production process of which they (the

resources) are a part. Resource users will thus treat these rents as a cost. There is no

discrepancy between total cost and total revenue and both equal total rents earned.

(Lewin & Phelan, 2002: 234)

Unless there is a difference between the ex post value of a venture and the ex ante cost of

acquiring the necessary resources, the entrepreneurial rents are zero (Rumelt, 1987; Peteraf,

1993). In a dynamic sense, such a situation cannot exist because a price of any resource

reflects the discounted value of its expected future earnings, so everyone shares the same

correct expectations towards it and the price includes all correctly anticipated value

components. The possibility of profit comes from ex ante risk and uncertainty, the

probability of profit comes from ex post realization of certain value. In this sense, the size of

super-normal profit, thus the competitive advantage of a firm, depends on the difference

between the ex ante cost of resources and the ex post value of them. This suggests that to

acquire a competitive advantage is no more and no less than to obtain the entrepreneurial

rents. We may say that the academic values can be found in the RBV when we view it in a

dynamic context.

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3. AMENDING THE RBV

3.1 Entrepreneur as a Resource

In case firms obtain a competitive advantage, resource heterogeneity does not necessarily

require by itself. In the dynamic world, the heterogeneous perceptions are more important

than the heterogeneous resources per se (Lewin, 2005; Lewin & Phelan, 2002). As a matterof course, such perception originates in the asymmetric information among firms. This

drives us, logically, to the situation that the function of ‘entrepreneurship’ and also the

ability to perceive market imperfection of information have to be incorporated into the RBV.

How to best evade the market imperfection or how to make good use of that imperfection is

very strategic decision made by a firm to gain a super-normal profit. And of course, the one

who will be in charge of this strategic task is an entrepreneur 5.

As an aside, even if it is logical to represent the function of entrepreneurship in the RBV,

how can we recognize the relationship between the RBV and entrepreneurship? For

recognizing this relationship, Casson (2004) helpfully points out that resource-based theoryhighlights the importance of human resources, as reflected in competencies and capabilities,

to the performance of the firm (Teece & Pisano, 1994). The theory of entrepreneurship

simply asserts that the abilities of the entrepreneur are the principal human resource

possessed by the firm. Other resources, such as the capabilities of scientists and managers,

derive from those of the entrepreneur, since it is the entrepreneur who has selected the

people with these capabilities to work for the firm6 (Casson, 2004).

Besides his remarks on the relationship between entrepreneurship and the RBV, Casson

made an important statement on the conceptual distinction of resources. As we formulated

the relationship above, we made a distinction between resources and capability in

accordance with the function of resources in general. In addition, here the concept of the

‘abilities of the entrepreneur’ is pulled out from the category of resources by its own

function. It is supposed that the abilities of the entrepreneur is of particular importance

when a firm needs to make decisions such as selecting people with the right capabilities to

5 We treat the entrepreneur as an entity, which takes a function of entrepreneurship, whichever it is a

particular person (entrepreneur) or not.

6

Casson’s definition of entrepreneur is as follows: “An entrepreneur is someone who specializes in taking judgmental decisions about the coordination of scarce resources” (1982: 23). Central to this definition is a

notion of a judgmental decision. This, Casson defines as a decision “where different individuals, sharing the

same objectives and acting under similar circumstances, would make different decisions” (1982: 24). They

would make different decision because they have “different access to information, or different interpretation of

it”. It follows from this definition that an entrepreneur will be a person whose judgment inevitably differs from

the judgment of others. The reward, then, for an entrepreneur derives from backing his or her judgment and

being proved right by subsequent events (Ricketts, 2002: 71).

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work for the firm, as these things require the entrepreneur’s vision and strategy. “The

essence of coordination is decision-making” (Casson, 1997: 78).

The firm is therefore not only the unit to cooperate and coordinate resources, but also the

one to specialize decision-making. Not all decisions are strategic and some decisions are

matter of a routine, but routine procedures have to be designed, and this is often a strategic

decision. When new threats or opportunities arise, procedures often need to be changed. Thedesign of new procedures is an important aspect of the entrepreneurial response to a

changing situation (Casson, 2003, 2004). Thus under some circumstances, the direction of

resources and capabilities are not chosen without the abilities of an entrepreneur. Those are

empowered by the entrepreneur’s abilities. The abilities of the entrepreneur here is a super-

ordinate concept to capability. Hence, the presence of the ability enables capability to be

performed along the entrepreneur’s vision or strategy, capability enables resources to begin

to be utilized, and the potential for the creation of service arises. The main source of the

competitive advantage is the abilities of the entrepreneur. We can formulate the relationship

as

S = f (E, C, R)

for some general function f (.) so that E, C, and R are the parameters of S, where E is the

quality of entrepreneur’s decision making, C is capacity of capability, R is resources, and

S is service.

While both invoking and amending the RBV from the entrepreneurial point of view, if we

take the goal of corporate strategy to be the creation of entrepreneurial rents, then the

objective of strategy is defined as follow:

Strategy is the function of a firm to obtain an entrepreneurial rent by exploiting the factor

markets disequilibrium (i.e., to maximize the difference between the ex ante values of

inputs and the ex post values of outputs in a dynamic world) through firm-specific

capabilities and resources which are directed by the abilities of an entrepreneur (originating

from the heterogeneous perception of the entrepreneur).

3.2 Exploiting the Disequilibrium

In the preceding section, we made a critical assessment of the RBV. It becomes clear that

the RBV has its own traits and potential as an academic thought when we grasp it in a

dynamic context. Now we have to explore how to exploit the factor markets disequilibrium

in order to create the entrepreneurial rents. Here we will suggest two ways for the

exploitation. One is ‘entrepreneurial arbitration’ and the other is ‘entrepreneurial

innovation’. Both of them share a fundamental proposition: the existence of unexploited

opportunities that no one exploits, while each of them have crucial distinction in terms of

their perception toward the market process in which the entrepreneur perform their role.

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The former is the way to create the rents as a return to the entrepreneur’s alertness in the

process of a new equilibrium (Choi, 1995; Gick, 2002; Hebert & Link, 1982). An

entrepreneur gains a profit by means of adjusting the value differentiation of any factors in

the existing market. For instance, if different price prevail in the same market, there is scope

for profitable arbitrage between the two segments of the market. Or if the prices of inputs

are out of line with the prices of outputs then there is scope for expanding the production ofsome products at the expense of others (Casson, 2003). It is nothing to say that we can

interpret the entrepreneurial arbitration as the concept belongs to the category of ‘accuracy’

and ‘speed’. Adjusting the differentiation of resource value more accurately and more

quickly than other individuals is one of the main ways to exploit the disequilibrium.

On the contrary, ‘entrepreneurial innovation’ is the way to create the rents as a return to

an entrepreneur’s discovery of new combinations as disturbing a process of equilibrium

(Choi, 1995; Gick, 2002; Hebert & Link, 1982). For instance, the entrepreneur conducts

innovation which is manifested in the introduction of new products or products with new

qualities, new production processes, new markets, the use of new raw materials and otherintermediate products, and the formation of new organization (Schumpeter, 1934). Creating

the differentiation of resource value proactively with other individuals is one of the main

ways to exploit the disequilibrium. It goes without saying that the former is consistent with

the thought of the Austrian school or Kirznerian (e.g., Kirzner, 1985) and the latter is

consistent with that of Schumpeterian (Schumpeter, 1934). Casson shows the distinction

clearly as follows:

The Austrian market process is usually construed, in neoclassical terms, as asserting that

markets are always out of equilibrium, and that entrepreneurial interventions tend to

move markets towards equilibrium, without them ever reaching that state. This

interpretation presumes, however, that the markets already exist: this is reflected in the

reference to entrepreneurial activities as speculation or arbitrage― both of these

activities which take place in established markets. Radical forms of market-making7

entrepreneurship, however, involve designing products or specifying services which did

not previously exist, and for which there was therefore no market. In absence of the

entrepreneur, therefore, it is not the case that markets would be merely out of

equilibrium, as the Austrian view suggests, but that markets would not exist at all.

(Casson, 2004)

7 Casson (2004) remarks that ‘market-making’ or ‘creating new markets’ is not the only form of

entrepreneurial activity, but it is an important and often neglected one. We treat here the market-making

activity as one of the disruptive or radical innovations, while most of innovation has incremental

characteristics.

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As one of the most important entrepreneurial activities, Casson (2004) emphasizes the

identification of changes in patterns of demand and creation of new markets by bringing

together suppliers of inputs and consumers of outputs. We can paraphrase the market-

making activity as an innovation to realize a future value system through the new

combinations of resources in the present time and space, while the arbitration is merely

exploiting the unexploited opportunities in the present existing market. It is not necessaryfor the purpose of this paper to enter into a detailed discussion on this distinction. It is

enough to mention here only that there are two ways for exploiting the factor markets

disequilibrium, i.e., adjusting the differentiation of resource value, and creating the

differentiation of resource value.

3.3 Illustration of New Perspective

It follows from what has been said that firms (hierarchy) and other forms of business

organization (arms length transactions, M&A, strategic alliances, etc.) serve as experimental

incubators for the entrepreneurial visions of various and varied resource combinations thatreflect the particular perceptions of the entrepreneurs. Finally, we take some examples here

to illustrate the new perspective for further empirical studies: the adjustment of the

differentiation of resource value through the M&A, and the creation of the differentiation of

resource value through the strategic alliances.

Adjusting the differentiation. The factor markets are often in disequilibrium. This

provides a firm with opportunities to acquire resources that are more valuable than other

firms believe them to be. By exploiting the disequilibrium, the firm will have the chance to

create a super-normal profit. Perhaps the M&A is one of the typical options that provide a

firm with opportunities to exploiting the disequilibrium, i.e., to acquire resources that are

currently undervalued in the market, and to identify the correct value of them through the

M&A.

If a firm overestimates a return potential from the resource that is acquired through the

M&A, the firm will probably sustain an economic loss in the long run. Thus, as a result, the

firm gains the competitive disadvantage vis-à-vis the competitor of the firm gain the

competitive advantage. In the same context, if a firm underestimates a return potential from

the resource that is acquired through the M&A, the competitor of the firm gain the

competitive advantage, if they estimate the value of the resources more higher than the firm

and acquire them at the price less than the actual vale of it.

Although such a valuation has to be made implicitly whenever the M&A is conducted,

the valuation of resources held by other firms is inherently difficult to make. Different firms

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will have different perceptions, which reflecting the disequilibrium in the factor markets8.

This is a reason why mistake are often made in the M&A, and a reason why successful

firms can earn substantial profits through the deals.

Perceptions toward risk and uncertainty are essentially subjective and relative. These

different perceptions provided a firm with opportunities to acquire someone’s resources,

which were more valuable than other firms believed them to be9

. Thus the M&A is a way(or experimental incubator) for a firm to identify the real value of those resources, and their

quality of perceptions toward resources as well.

Creating the differentiation. On the other hand, there is no existing market in the phase of

the market-making, thus a firm will not able to identify any value of resources unless they

create the new market where these resources are utilized. Because few firms possess enough

resources in order to establish the new market, strategic alliances are one of the useful

options for the firm to overcome the resource restrictions.

In this phase, there was a great deal of risk and uncertainty, because no one confirmswhether the market would be expanding or not. Some firms may perceive a low risk where

other firms perceive considerable risk to engage in the market-making process. Hence, each

of them have to evaluate how much they should engage in the alliances, how much they

should invest in resources they bring into the alliance, and the value of resources that allies

bring into the alliances. Different firms will arrive at different perceptions, reflecting the

markets disequilibrium for any resources.

In a valuation process, strategic alliances are normally joined if all allies are relatively

optimistic about the market prospects, and the value of the resources that they bring into the

alliance. It is, however, inherently difficult to perceive the future of the market, and the

value of the resources that allies bring into. This is the reason why most of strategic

alliances are in vain. Some firms strongly take part in the alliance, while others often decide

to withdraw from the alliance, or just put their name on the list of the ally. On the other

hand, if all allies share the optimistic perceptions, they can probably earn substantial profits

through the alliance.

Perceptions toward risk and uncertainty are essentially subjective and relative. These

different perceptions provided a firm with opportunities to realize the value of any resources,

those are unvalued (value are unknown) in the present time and space, in the future market.

The strategic alliance is a way (or experimental incubator) for firms to identify the real

8 The managerial foresight or the ‘accurate expectations of return potential of the strategy’ that Barney (1986)

noted is similar to one of our concepts, i.e., ‘entrepreneurial arbitration’ (adjusting the value differentiation in

the factor market).

9 If resources cannot be acquired in the market because of its nature (e.g., knowledge embedded in routine

work, skills of labor, a variety of know-how pertaining to technology and production), these resources can be

more efficiently acquired through the strategic alliances, e.g., an inter-organizational learning.

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value of unvalued resources, and their quality of perceptions toward the market prospects

and these resources.

SUMMARY AND CONCLUSIONS

To begin with, a brief survey was given on the conceptual framework of the RBV bycontrast with the CFA. The first point we examined was Barney’s fundamental concept of

the RBV. From a static point of view, we showed that his concept of ‘valuable’ and ‘rare’

resources does not fulfill the conditions for acquiring and realizing a competitive advantage.

Because firstly, either the investment necessary to build up resources and the demand-side

characteristics that ought to evaluate the value of these resources are exogenous to his

framework. Secondly, after remunerating all the factors of production, no competitive

advantage has been left to a firm whether the firm possesses ‘rare’ resources or not. All of

the ‘rare’ resources ought to be of value to their owner. On the contrary, from a dynamic

point of view, we could find an implied possibility in his framework that the competitiveadvantage may come from ‘imperfections in the factors markets’. Different firms and

different owners in these markets will have different expectations about the future value of

those resources that create this imperfection. Therefore, different perceptions toward

resources produce the possibility of a competitive advantage. This indicates that the abilities

of the entrepreneur lie in discovering how to generate the real economic value with their

resources in ways that others cannot anticipate.

The second point considered was the relationship between resources, capabilities, and the

abilities of the entrepreneur, by invoking Casson’s work. We suggested that the main source

of competitive advantage does not fall into the heterogeneity of resources and capabilities

per se, but the heterogeneous perceptions of the entrepreneur. The abilities of the

entrepreneur enable capabilities to be performed along the entrepreneur’s vision or strategy,

capabilities enable resources to begin to be utilized, and the potential for the creation of

output arises. By treating the relationship as such, we concluded that the objective of

strategy is as follows: strategy is the function of a firm to obtain an entrepreneurial rent by

exploiting the factor markets disequilibrium (i.e., to maximize the difference between ex

ante values of inputs and ex post values of outputs in a dynamic world) through firm-

specific capabilities and resources which are directed by the abilities of an entrepreneur

(originating from the heterogeneous perception of the entrepreneur).

After mentioning two ways for creating entrepreneurial rents, i.e., entrepreneurial

arbitration and entrepreneurial innovation, we took some examples to illustrate the new

perspective we have developed for further empirical studies.

Although many scholars have contributed to identify the mechanism of sustainable

competitive advantage through the RBV of strategic management, Priem and Butler (2001b)

hope that the entrepreneurial strategic decision process and the RBV will each receive a

deserved level of scholars’ attention, fewer attempts have been made to grasp the role of

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entrepreneurship as the source of competitive advantage. In order to deepen the

understanding of the source of sustainable competitive advantage of a firm, we have to pay

attention on not only to the ex post mechanisms in which a firm manage to assure the

realization of certain value, but also to the ex ante mechanisms in which an entrepreneur

attempt to exploit the differences in their perception toward the risk and uncertainty. This

work has taken only the first step in that direction.

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Amending the Resource-based View of Strategic Management From an Entrepreneurial Perspective

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